Covid-19 – changes to insolvency laws give distressed companies breathing room

The Finnish government announced on Saturday 28 March 2020 that it will prepare changes to Finnish insolvency laws in order to give companies the breathing space they need to pull through the pandemic.

Most importantly, the creditors will not be able to apply for corporate bankruptcy of a debtor company solely over short-term payment default. In addition, the Bankruptcy Ombudsman has given recommendations on how to consider late payments in restructuring proceedings during the pandemic.

Temporarily Suspending the ‘Seven-Day’ Rule

The Finnish Ministry of Justice is drafting new temporary legislation that will restrict the creditors’ right to apply for corporate bankruptcy of a debtor company.

In Finland, a company must be insolvent in order to be declared bankrupt. If a company has not paid its debt in seven days after receiving a payment demand from a creditor, the company is assumed to be insolvent and the creditor may petition the court to declare the debtor company bankrupt. With the proposed changes, this presumption will be temporarily removed. Once in force, creditors will be expected to take this into account in their debt collection measures.

The proposed change is very welcome in these stormy times. Many companies have either already faced or will soon face difficulties paying their debts on time. However, for many companies, the insolvency that results from the pandemic will only be temporary. This proposed relief will give companies extra time and space to navigate their way through these difficult times.

Nonetheless, it is worth remembering, that this change will only freeze the seven-day rule. There are other situations when the debtor company is assumed to be insolvent, but the goal of this measure is that the insolvency must exist for a lengthier period before a creditor can file for bankruptcy during the pandemic.

Ongoing Restructuring Proceedings

The current situation will also impose challenges to companies that were already facing difficulties before the pandemic. Companies in restructuring proceedings may very well struggle to pay their new debts as they fall due.

Typically, this would give the administrator the option of breaking off the proceedings if it is likely that the company will not be able to pay its new debts. Due to Covid-19 outbreak, the Finnish Bankruptcy Ombudsman has recommended that the administrator evaluate each individual case carefully and consult with the creditors concerning whether they would be willing to review the company’s ability to pay new debts over a longer run.

If it is likely that the debtor company will still have a viable business that can be restored after the pandemic, the debtor company’s new obligations can be reviewed over a longer timescale and the proceedings should not be terminated just because the debtor company cannot temporarily pay its new debts.

This is another important and much needed relief for distressed companies to weather the storm—and hopefully one that will be applied in practice. It would not be in anyone’s interest to terminate restructuring proceedings and force a debtor company into bankruptcy over short-term payment difficulties caused by the pandemic.

Looking Abroad

A number of governments have similarly introduced tools to aid distressed companies in the Covid-19 turmoil. As a Finnish lawyer currently living and working in the United Kingdom, I thought a brief review of the UK government’s measures could provide an interesting point of comparison.

The government in the UK also announced changes to insolvency laws in response to the pandemic on 28 March 2020.

For instance, the UK government will temporarily suspend the wrongful trading provisions that pose the threat of personal liability for the directors of a company. In UK, in case of insolvent liquation or insolvent administration, the directors of the company may face personal liability if they fail to take every step to minimise the potential loss to creditors.

This suspension will give company directors greater confidence to use their best endeavours to continue to trade during the pandemic, without the threat of personal liability should the company ultimately fall into insolvency. Existing laws for fraudulent trading and the threat of director disqualification will stay in force and will aid in preventing director misconduct.

Due to the pandemic, the UK government is also accelerating the implementation of new restructuring procedures that were announced already in August 2018. These measures include a new type of restructuring plan and a moratorium to protect companies’ essential supplies and to give them time to seek a rescue plan.

As opposed to the insolvency regimes in many other countries, Finnish insolvency law does not set an obligation for the directors to file for bankruptcy or include the risk of personal liability. However, even though an insolvent company can technically continue trading, the directors need to be very diligent in order to avoid criminal liability or liability for damages.

Further Action Needed?

Finland as well as other countries are introducing much welcomed suspensions and changes to insolvency laws. While the differences in insolvency regimes mean that the solutions adopted in one country cannot always be transferred to another, it is worth keeping an eye on what measures various countries are implementing to aid companies and businesses to cope in these exceptional times.

As we do not yet know how long these exceptional times will affect our lives and how deep the difficulties that follow will be, it remains to be seen if the measures that have now been introduced will be sufficient to help companies weather this storm or whether further action will be needed. 

The full text of the Finnish Ministry of Justice’s announcement on 28 March 2020 can be found online .

The author is a Finnish insolvency lawyer and qualified solicitor currently based in London.

The coronavirus outbreak is a rapidly developing situation. This information reflects the situation at the time it was published 1 April 2020 and is subject to change.